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In this update we review the decision of the Supreme Court in the 'Rangers EBT' case and look at what clients might now expect from HMRC and their options going forward. The nature of the decision appears broad enough to impact most situations where a HMRC believe a ‘disguised remuneration’ scheme has been used (not just EBT arrangements) and so we expect a lot of HMRC activity in the coming months.
What did the Supreme Court decide?
It didn’t come as a huge surprise to us that this decision went against the taxpayer given the nature of the previous decision by the Court of Session.
In essence, the Supreme Court’s decision affirmed the lower courts view that the EBT arrangements were no more than a ‘redirection of earnings’ by the employee. The Judge dealt with Counsel’s argument that in order for there to be a redirection of earnings there had to be more than just the payment of money arising from the performance of the duties of employment; there had to be also be a legal right to receive the payment and it had to be paid at the direction of the employee to a third party. This could not be the case with the EBT arrangements because the employee never had the right to receive the sums paid into the sub-trust. The Judge appears to have dismissed this argument by reviewing the relevant statutory provisions relating to employment income and emoluments and concluding that none of this legislation contains any such requirement for there to be the legal obligation suggested by Counsel. The Judge then looked at situations which could be regarded as an exception to this position (e.g. the taxation of perquisites, benefits in kind and payments to an employee based on a contingency) and decided that these did not alter his conclusions or were not relevant in determining the appeal.
The legal analysis was then applied to the facts and the Judge concluded that when looking at the arrangements as a whole and their purpose it was clear that the sums paid into the trust (for both footballers and general employees/directors) were earnings at the point the sums were paid to the Principal Trust.
The decision also considered whether there were any other statutory provisions which could impact on this decision (e.g. benefit in kind rules on beneficial loans or a Part 7A ‘disguised remuneration charge) and concluded that these had no impact as the amount being paid into the EBT was earnings and so could not, for example, be regarded as a loan.
What can clients expect next from HMRC?
The expectation is that HMRC will use this decision to issue Follower Notices (which are likely to be accompanied by an Accelerated Payment Notice) in the near future. The deadline for issuing a Follower Notice (“FN”) is, in most cases, within 12 months of the final decision (i.e. before 5 July 2018). There are, however, a number of conditions which need to be met before HMRC can issue a FN. The prerequisite is that there is an open enquiry or an open appeal (e.g. against a Regulation 80 PAYE determination). So, clients where there are no open enquiries or HMRC has not raised the necessary determinations are unlikely to receive a FN (although they may not yet be clear from any future HMRC action- see below).
Clients who do receive a FN will need to carefully consider it and evaluate whether the decision applies to their specific arrangements or if the facts can be distinguished. Representations on this basis should be considered.
What impact does this decision have on the potential 2019 Loan Charge provisions?
It seems to us more likely than not that the 2019 Loan Charge provisions will be included in the summer Finance Bill (especially given the content of the Queen’s Speech). If these provisions do become law then HMRC now has a final decision that payments to an EBT are earnings at the point the contribution is made to the trust.
The 2019 Loan Charge provisions essentially seek to tax outstanding loans from disguised remuneration structures as earnings unless they’ve been repaid or been subjected to income tax. Absent the Ranger’s decision we think it would have been difficult for HMRC to seek to collect interest on a 2019 Loan Charge settlement on the basis that the actual PAYE/NIC liability existed back when the amounts were paid to the trust. It might therefore have made financial sense to await the 2019 provisions and pay the PAYE/NIC on a current year charge basis (and avoid the interest). However, now that HMRC has this decision it seems to us that it has more scope to seek to pursue interest due on the unpaid PAYE/NIC at the point the sums were paid into the trust even where payment in being made in April 2019. For many clients, this was may years ago and so the interest bill can be significant.
What should clients do now?
On the basis that the 2019 Loan Charge provisions will be enacted, our view is that clients should now seriously consider settling with HMRC. A settlement has the advantage of engaging with HMRC on points such as any CT adjustments which may be due to offset against the PAYE/NIC liability etc. Where a client has difficulty in funding the final agreed amount, a settlement usually allows more flexibility in terms of a negotiated payment plan.
In addition to the above, our sense (and we may just be being paranoid!) is that as we approach April 2019 there is a risk that for those clients who do not settle with HMRC, we could start to see an approach where both the amounts paid in are taxed as earnings and the CT deduction claimed on the payments to trust, disallowed. Our basis for this concern are recent decisions by the Courts and Tribunal. In a very recent decision (Alway Sheet Metal Limited v HMRC TC05686) the First Tier Tribunal decided that the contributions to the trust were not allowable for CT purposes on the basis that they were not ‘wholly and exclusively for the purposes of the trade”. Specifically, the Tribunal Judge considered this to be the case even if it was agreed that the payments into the EBT were earnings (i.e. the Judge decided there was no general principle which meant that something said to be earnings was allowable as a tax deduction against the company’s profits. Instead you had to go back to the question of whether the payment was wholly and exclusively incurred). Whilst only a FTT decision (and so not producing a legal precedent) it may well be used by HMRC as an indication of the judicial view in cases where they are seeking to tax both the payments to employees and disallow the CT deduction. We have recently seen this approach from HMRC as part of it’s conclusions in issuing a closure notice for an enquiry.
How can we help?
We have settled a large number of EBTs and similar structures for clients. We understand in detail HMRCs settlement principles and have relevant relationships within HMRC to ensure that our clients engage effectively and efficiently. Coupled with this is our detailed knowledge of HMRCs assessing powers and experience in responding to Follower Notices and Accelerated Payment Notices.
We help clients to understand their options and make informed decisions on the way forward.
If you would like more information on these issues please do not hesitate to get in touch.